Credit where credit is due

I’m usually critical of the Vanderbilt administration on this weblog, but today I can report some good news: the Dining monopoly appears to be nearing an end. Dining has initiated a pilot program for 300 students to use their Vandy Cards at several off campus establishments. Assuming it goes well, Dining hopes to extend the option even further.

Vandy’s dining monopoly was always one of my pet issues as a student and I’m glad to see change finally in the works. For years, the university dining services have been insulated from competion by Vandy’s debit card. The card could only be used on campus and it took about two weeks to withdraw one’s funds. This gave Dining a huge advantage over the many local competitors with whom students had to use cash or credit. Predictably, this allowed Dining to get away with lower quality food than would be acceptable at restaurants located just a couple blocks away.

Praise to Frank Gladu for implementing this change. The competition will give students more options and spur improvements in Vanderbilt’s eateries. It’s a good decision all around.

Comments

Jacob, you and I have long been at odds on this issue and I’ll happily continue to antagonize. The dining monopoly has gone nowhere; it’s simply getting better at putting on a facade to placate the students and transferring the costs to unsuspecting victims.

Just like the maligned agreement to use the Vandy Card at the new Provence on-campus cafe, local business have to meet three conditions in order to use the Card. First, they pay for the Card reader and installation costs of all parts including a dedicated network line. Second, they pay a flat monthly maintenance fee to Vanderbilt Dining regardless of the revenue generated from Card sales. Third, they pay a commission to Vanderbilt Dining that I understand to be approximately 15% on all business conducted on the Card. These conditions are set in order to ensure that Vanderbilt Dining continues to benefit even if competition results in a loss of customers, and the severity of the conditions suggests that Dining in fact expects an exodus and plans to be ready for it.

So you’re a local business with a modest revenue stream that comes largely from students, and you decide to accept the Card. Wouldn’t your biggest fear be that all current students will now use their Vandy Card instead of cash, resulting in an immediate 15% revenue loss in your largest demographic in addition to the new fixed costs? Clearly this risk has to be weighed against the potential benefit of drawing additional customers off campus, or at least the potential risk of losing customers to other businesses that do decide to accept the Card. I can see why certain types of businesses — particularly those whose services aren’t already offered on campus such as hair salons or sushi shops — would balk at the notion of accepting the Card. And if a business accepts the Card and its greatest fear is realized, how will it recoup the costs? By charging Card users a special fee, at which both the university and students would almost certainly balk? By raising all prices?

If the Card is just money no different than cash or debit card, then what difference does it make whether or not students have the ability to use it off campus? Sure, some people simply want the convenience of leaving their dorm room with nothing but their key and Card, but unless/until the Card is accepted as readily as a debit card this benefit is extremely targeted. Nobody ever says it, but there is only one reason why students really want to use the Card off campus: it’s not their money. As an elite private expensive university the money on most Vandy Cards comes from the parents, and students who do pay for their own expenses are already cognizant of the higher prices on campus and pay cash off campus anyway. Why else would any rational player pay 85 cents for a can of Coke in the vending machine or $7 for a pack of cigarettes at the on-campus store? Because the consumer’s choice isn’t an 85-cent Coke on campus vs. a 50-cent Coke off campus; it’s 50 cents off campus vs. “Daddy’s buying” on campus. And parents aren’t aware, or are perhaps too naive, of the choices their students are making with their blank check.

My larger point here is that Vanderbilt is a private institution that has prioritized building community as a central tenet of its mission, and Vanderbilt believes that the only real choice a student has in the way in which it chooses to exercise this mission is the choice whether or not to enroll. As such, the university will continue to protect on-campus dining as an essential component of that endeavor regardless of what minor cosmetic changes it makes to weather periodic public relations crises with the students. The decision to use the Vanderbilt Card off campus is an open conspiracy between Vanderbilt Dining and Vanderbilt students. The students reap a huge benefit as their personal cost for off-campus items drops from retail price to free. The cash-paying consumer and the businesses mututally lose as additional business costs are transferred to them. The parents take a dead-weight financial loss and neither Vanderbilt nor their students obligated in any way to notify them. And Dining endures as always, perhaps even looking good in the process for “increasing student choice”.

Anybody wanna tell me how this game is a victory for market liberalism?

As Chad says, this is the kind of university issue we’ve disagreed about for a long time and had many discussions about. I’ll address his many objections.

So you’re a local business with a modest revenue stream that comes largely from students, and you decide to accept the Card. Wouldn’t your biggest fear be that all current students will now use their Vandy Card instead of cash, resulting in an immediate 15% revenue loss in your largest demographic in addition to the new fixed costs? Clearly this risk has to be weighed against the potential benefit of drawing additional customers off campus, or at least the potential risk of losing customers to other businesses that do decide to accept the Card…

The case is analogous to credit cards. These are certainly expensive for establishments to accept, sometimes resulting in pure unprofitability on some sales. Yet restaurants accept them anyway because the added convenience brings in more customers, encourages them to spend more, and makes spur of the moment purchases more appealing. I expect the same will be true of the Vandy Card, as apparently do the businesses that have already signed up to accept it. If they and I are wrong then, of course, the program will be a bust.

…I can see why certain types of businesses — particularly those whose services aren’t already offered on campus such as hair salons or sushi shops — would balk at the notion of accepting the Card…

Even if a particular type of business isn’t already available on campus they could still find it in their interest to accept the card. There’s no significant sushi competition on campus (I don’t count the refrigerated sushi in the Munch Mart. Anyone buying that is a lost cause.), but any particular sushi restaurant would be glad to be the one place where students could go and pay on the card. And even if all the sushi restaurants accepted the card, they could still benefit from increased demand as described above.

These businesses might also find accepting the card to be a useful form of price discrimination, since even college students at Vanderbilt (other than Tri-Delts) are a price sensitive bunch. Accepting the card would be equivalent to offering a student discount, which a number of businesses already do.

And if a business accepts the Card and its greatest fear is realized, how will it recoup the costs? By charging Card users a special fee, at which both the university and students would almost certainly balk? By raising all prices?

Its “greatest fear” would have to be students using the card without increasing demand in any of the ways I described above. That seems extremely unlikely to happen. But if it does, the solution is simple: drop out of the program. I suppose it’s possible the business owners could have a collective action problem here, where all of them would benefit if they all quit, but none would benefit just by their own quitting, but that also seems unlikely since this is a gradually implemented test program. If it doesn’t go well for the early adopters, I doubt other businesses will be hopping on to the bandwagon.

Nobody ever says it, but there is only one reason why students really want to use the Card off campus: it’s not their money. As an elite private expensive university the money on most Vandy Cards comes from the parents, and students who do pay for their own expenses are already cognizant of the higher prices on campus and pay cash off campus anyway.

I actually thought about saying that in the original entry. I should have. I agree with you completely, but this doesn’t have anything to do with whether the competition will force improvements in Vandy’s dining halls.

The cash-paying consumer and the businesses mututally lose as additional business costs are transferred to them. The parents take a dead-weight financial loss and neither Vanderbilt nor their students obligated in any way to notify them. And Dining endures as always, perhaps even looking good in the process for “increasing student choice”.

In order for the cash-paying consumer to lose, a business would have to generate so much of its revenue from price inelastic Vandy Card sales that it would find it profitable to raise its prices for everyone. I don’t think there are many businesses where that could possibly happen. And if it did, then your very next point would clearly be wrong: the business would not mind bearing the additional costs in order to bring in such floods of students who don’t care about price.

I agree that the parents could end up taking a net loss on this. But when has Vandy ever been concerned about costs to parents! On the other hand, it could encourage some frugality with use of the Card. For example, there were many instances when I chose to buy items at a higher price in the Munchi Marts then I could have paid at Eckerd or CVS for precisely the reasons we describe. If Eckerd or CVS accepted the card, I wouldn’t have had to do that.

Anybody wanna tell me how this game is a victory for market liberalism?

Well, I’ll grant that the fact that Dining still gets a cut from other businesses weakens their incentive to improve. But it doesn’t eliminate it. Even if Dining doesn’t improve, students clearly benefit from the added choice. (Unless you think that being able to more easily eat off campus excessively undercuts community.) I’ll stand by my post — and we’ll have this same debate again in some other form, I’m sure!

What *I* want to know is where Chad can find a vending machine these days that still hands out 50-cent Cokes.

As a former worker at the Card Office, and one who’s staunchly adopted their perspective on the situation, I’d like to remind you guys that the university itself put considerable cost in setting up its debit card system and maintaining the flow and ebb of cash in it. It should be pointed out that students don’t need to put any money at ALL on the card: the university offers the service as a convenience (the cost didn’t come out of our tuition, either; the card office has its own budget). Why should the university be forced, then, to distribute the profits from its system to outside vendors without asking for a fee?

Also, the two-week wait that Jacob points out is necessary because of federal regulations. The university can’t allow students to add money to the card by signing those white cards and then immediately withdrawing actual cash. That would be the equivalent of a loan, which would require the university to follow federal banking regulations.

This is what I would smugly say to all those frat boys trying to withdraw money two days before spring break. Those moments were among the best in my undergrad career.

Zhubin: good point about the 50-cent Cokes; if I’m going to have any chance at proving my point I could at least make my examples less absurd. Or perhaps Vanderbilt can get Sam’s Club or Costco on the Card.

Jacob, I see us diverging primarily on two issues: the specific idea that businesses will ultimately recover in added business the costs incurred in accepting the Card, and the broader notion of benefits drawn from increased student choice. I’ll try to respond to both.

I agree that the business decision to accept the Vandy Card is analogous to accepting a credit card. Certainly the first businesses that ever accepted credit cards were willing to incur a cost in order to provide an added service to their customers. Eventually nearly all businesses began to accept credit cards, competition between credit card companies drove down the cards’ operational costs, and the average consumer now enjoys an added payment option in exchange for a minor across-the-board increase in prices of products. But suppose the credit card company already has a monopoly on all the customers and owns the only business at which they shop. The only pressure it faces to expand card use to other businesses is for public relations value, and even then it is only willing to do so by taking a huge slice of the profits as an incentive to maintain its monopoly status. I think it is fair to assume that Vanderbilt’s monopoly on the Vandy Card as a method of payment is not subject to normal competition, and that as a result we cannot assume that the business costs imposed on Card sales will be reduced over time.

So, for simplicity’s sake let’s assume a 15% cost on all Card sales imposed in both the short and long term. For Papa John’s to start selling pizzas on the Card (as it plans to do on both carry-out and delivery orders) it must believe that the post-commission revenue from new Card-using customers will match or exceed the loss of revenue from existing cash-paying customers who transfer to Card use (OR it must assume that the long-run public relations value of accepting the Card will somehow outweigh the business costs, but let’s stick with the assumption that at the end of the day it’s all about profit). So what we’re really asking here is how many meals do students eat on campus that they’ll now eat off campus because of the Card, and of those meals how many will be eaten at Papa John’s as opposed to other Card-accepting restaurants? It’s an unknown variable that apparently several businesses have decided to test.

Forgive me, though, for being less optimistic than you about the ability of Papa John’s to sufficiently increase market share in the only demographic that matters: whatever percentage of 6000 Vanderbilt undergrads was only staying on campus because they wanted to spend Daddy’s money instead of their own, divided by the number of Card-accepting restaurants according to their relative demand. And I assure you, Vanderbilt Dining was running these same numbers long before you or I brought it up which is why they set up such a fee structure in the first place. Incidentally, I don’t think it would be a bad idea at all for a business accepting the Card to charge a usage fee equivalent to the fee imposed by Vanderbilt — it would deter price-elastic student customers from switching to Card use without affecting the price-inelastic students who don’t care how much of their parents’ money they spend. But I wonder if Dining already planned for that when they drew up the contracts

(Note to readers: I keep using Vanderbilt and Dining interchangeably. That’s because the Director of Vanderbilt Dining and the Director of the Vanderbilt Card Office are the same person, for monopolistic reasons that should be clear by now.)

In any case, I think dropping out of the program is one of the worst outcomes for businesses that can’t recover costs. It’s a public relations hit that disgruntles both new Card-using customers and existing cash-paying customers who now happily use the Card. Public relations is clearly the reason why businesses that were approached about the pilot program but declined to participate have refused to reveal their identities. Dropping out is an even greater problem if more businesses are in the program because of the collective-action problem you mentioned. Plus, it allows Dining to claim victory by saying it tried to appease the students and the businesses just wouldn’t play ball. Dropping out is an option, but not a very good one.

Finally, I’ll return briefly to this notion of greater student choice. Yes, it’s absolutely true that students will have more choices, but only in a fairy-tale way that doesn’t reflect a true competitive model. The parents who are putting money on the Card are paying for convenience and community. Though it’s technically public information, nobody bothers to mention to the parents that their students can use the Card to buy overpriced CDs in the bookstore or buy textbooks and return them for cash or buy $7 packs of cigarettes or just wander into the Card Office and make a cash withdrawal. If the parents really thought about these things, they’d either just hand the student the cash or they’d request itemized Card statements mailed to their homes. But since they do neither, we can only assume the parents are ignorant of the actual choices being made and are blindly supporting the notions of convenience and community. They aren’t complaining because they’re getting what they signed up for, just with massive inefficiencies and costs hidden at the back end that are bad for competition overall. Saying the student benefits from additional choice in this scenario is like saying I benefit when the government adds a higher-benefits option to my national healthcare plan and raises my parents’ taxes to pay for it.

I’m afraid I still don’t see how it’s in the libertarian interest to favor increased choices within the common currency if the monopoly still controls the currency and manipulates it to favor its interests. Instead of trying to expand the Card off campus, why aren’t we waging a public awareness campaign to keep parents from putting money on the Card at all and just pay students cash allowances? Then Dining would only remain financially self-sufficient if and only if enough students and their parents were truly trading higher costs for added convenience, or else Dining would have to adapt its business model to remain competitive. Why wouldn’t student activists for higher quality food support a plan like this instead? Oh, that’s right, the parents might actually monitor the cash flow because it would be “real” money.

How about a slightly unspirited rebuttal? Because I agree with you in part and fear that the only people still reading this far are you and me.

I agree with you that the optimal solution would be for parents and students to be made more aware of the inefficiencies built into the card system and switch to a cash flow instead. That would eliminate a lot of the monopoly problems we discuss and the Card could still be used in cases where it really is worth the convenience.

Unfortunately, I don’t think that’s a realistic option. I’m happy with expanding the Card’s usefulness of campus as a second best solution.

I’m going to disagree with you by complicating your economic analysis a little bit. There are two considerations that make me more optimistic than you on the Papa John’s example. One is that accepting the Card will work from their perspective as a form of price discrimination, granting them access to the pool of students spending daddy’s money while still charging the regular price to all non-Card using customers.

The second complication is that accepting the Card doesn’t simply increase their business costs on those sales by 15%. By increasing volume, it also lowers their average cost per sale (since many of their costs are fixed).

All of this is implicit in your analysis, but leaving it unstated while focusing on Dining’s cut makes the outlook seem much worse than it is.

A third reason to trust Papa John’s judgment? They have money on the line, while we’re just a couple of guys who spend too much time on their laptops.

Good points. You’re right that the economic analysis is more complex than I make it sound, and that (hopefully) any business willing to undertake what seems like a significant risk will have crunched their own numbers far more thoroughly than we have in our cursory glance.

Worried that nobody’s reading this far down though? Tsk tsk, Jacob — it’s in the bowels of these comment sections that the pedants seek refuge from the narcissists

I read this far, and I don’t even know 2/3 of you. I’m Chad’s friend from Washington state by way of Cambridge, England. My experience at an utterly non-elite state school is that students here are, as you’d expect, more frugal, as the money on their cards is from their summer job bucking bales. But their hesitation to spend money probably comes less from frugality and more from the fact that it’s a commuter school, and if they’re going to go off campus, they might as well just go home.

Reading discussions like yours makes economics seem so enjoyable, but after fleetingly wishing that I’d pursued such disciplines in college, I remind myself that this is the inspirational equivalent of watching Dead Poets Society and rushing out to get an English degree–eventually, you’ll have to read 18th c. Restoration comedy sans Robin Williams’ interpretation.

First of all I must say that I’ve just read the first 4 posts. Chad’s second intervention scared the hell out of me. I cannot add much to your debate because I belong to a totally different university system: the European university system. This means that my tuition fee at Universidad Complutense de Madrid (UCM – public school) used to cost less than 600 Euros a YEAR, I live at my parents place and there aren’t any golf courses in my campus… and yet, getting a university degrees in such conditions is more prestigious than doing so at a private school!!!

From all I’ve read so far what has impressed me more is that a can of coke is 0.85 cents at VAN!!! I shouldn’t be surprised ‘cos I’ve bought cokes at Vanderbilt, and even quesadillas, but I still think it is a robbery. In my country, university bars are ALWAYS cheaper than ordinary off campus pubs. Why so? Probably because they realize that the purchasing power of youth is not that big and that it is better to sell “much but cheap” than “few but expensive”.

Concerning the use of debit cards among native students: Well… some universities tried hard to promote the use of “tarjetas-monedero” (debit cards that have both a chip and a magnetic band) which allow you to make small payments without charge to the shop (or with an almost symbolic charge). The point was making people use plastic money to pay for coffees, photocopies and such. However, even though Spain is the European country with more debit cards per inhabitant, this initiative was quite a failure. Nobody followed it. The reason: culture. Spaniards mainly use their debit cards to withdraw money from cash dispensers, rather than to make purchases.

I realize this hasn’t got much to do with your talk, but both Chad and Janelle can asses that I like digressions.

Please, do excuse any grammar mistakes that I might have done.

E.

PS: You can buy a coke for 0.50 cents of euro (0.65 dollars) at Cinco Días, a newspaper where I worked this summer. But that’s unusually cheap. On the other hand, a can of coke costs 1 Euro at the airport of Madrid.

Trackbacks

Now that I’m no longer AWOL, I’ve really enjoyed playing catch-up on reading the blogs of friends and fellow Vanderbilt grads. It turns out Jacob Grier and Joel Hart have decided that the Confederate Memorial Hall issue is an old dying horse worth beat…

Jacob Grier is a freelance writer, bartender, cocktail consultant, and magician in Portland, Oregon. He writes, eats, and drinks a lot. His articles have appeared in the print or online editions of The Washington Post, The Atlantic, The Daily Beast, The Los Angeles Times, Reason, The Oregonian, and other publications. His book on beer cocktails, Cocktails on Tap, is forthcoming from Stewart, Tabori, and Chang in 2015. [Photo by David L. Reamer.]